The Regional Comprehensive Economic Partnership (RCEP), a regional trade agreement involving ten ASEAN members and six of their neighbours ~ Australia, China, India, Japan, New Zealand, and South Korea ~ would account for half the world’s population and one-third of the global income. It would be the largest ever regional trade deal ever concluded ~ a deal that economists, Peter Petri from The Brookings Institution and Michael Plummer from Johns Hopkins, estimated as having the potential for global economic growth by close to $ 300 billion annually, if put in place by 2030. Negotiations for this massive trade deal which was first suggested by China in 2011 has been going on since November 2012.
The final agreement was supposed have been signed by all the sixteen nations on November 4 in Bangkok, but India backed out at the last moment, with Prime Minister Narendra Modi stating clearly, “When I measure the RCEP agreement with respect to the interests of all Indians, I do not get a positive answer. Therefore, neither the Talisman of Gandhiji nor my own conscience permits me to join RCEP.” He has very concrete reasons for saying so, though it is not sure if withdrawal was the best option for India. It was reminiscent of Donald Trump in 2017 withdrawing from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a 12-nation agreement covering not only trade but also labour standards, public sector undertakings and environmental protection, as against RCEP’s limited coverage offering only a gradual reduction or elimination of import duties among the partner nations.
RCEP has been sneered as a “stapler”, signifying the wide divergence of interests among its members made to converge by the treaty that India considers unfavourable towards its own domestic interests. At the heart of India’s concerns is China, with which India ran a trade deficit of more than $53 billion in FY 2019. India rightly fears that any lowering of tariffs will make cheap Chinese goods swamp the markets in this country, killing domestic industries, apart from widening its yawning trade deficit with China. Not only China, but India also fears that its dairy farmers would not be able to compete with grain from Australia and milk and dairy products from New Zealand.
Like China, these countries also enjoy an unbridgeable cost advantage over Indian industries due to their mechanisation of the farm and dairy sectors. Our civil society and Opposition parties have been unanimous in indicating the millions of possible job losses that might result, and not without logic. India ran a merchandise trade deficit with 11 out of the other 15 RCEP partners amounting to $107 billion in FY 2019. With ASEAN, it had signed a Comprehensive Economic Partnership Agreement (CEPA) in 2009. India also has bilateral free trade agreements (FTA) with Japan and South Korea and some members of ASEAN itself, like Malaysia, Singapore and Thailand. Under these treaties, both parties have agreed to eliminate import duties on most of the goods traded, often to India’s advantage. But it is the uncompetitive domestic industries that was behind India’s insistence to seek an auto-trigger mechanism that would allow it to raise tariffs on imports from the partner countries exceeding a certain threshold, and upon getting their credible assurances for more market access for Indian products.
Even with a threshold, there was concern about possible circumvention of the “rules of origin” of a product which in the present form do not prevent any country, China for example, from routing, through other members with lower tariffs, more of its products to flood the Indian markets. Another concern was over the non-tariff barriers, on which China’s record has been notorious. China has repeatedly raised non-tariff barriers to prevent Indian and other countries’ exports from entering the Chinese market. Further, India had joined the RCEP negotiations in 2013. Since it has raised import duties on a number of traded goods since then, it has been seeking 2013 to be recognised as the base year for tariff reductions, against 2014 insisted on by the RCEP partners.
This would mean a sharp reduction in Indian import duties on these products, leading to revenue loss at a time when the economy seems to head south. As of 2018, India’s shares in the global exports and imports of merchandise trade have been only 1.7 per cent and 2.6 per cent respectively, compared to 12.8 and 10.8 per cent of China’s. In FY 2019, India’s overall merchandise trade deficit was $176 billion, with 34 per cent of imports from and 21 per cent of exports to only RCEP countries. India also runs a services trade surplus with the world ($80 billion in FY 2019), which could be a substantial engine of its growth. With its competitive IT sector, RCEP would have given a platform to explore new markets abroad. It hardly makes any sense to opt out of the World’s fastest-growing region and huge potential export market for India.
Besides, India also lost an opportunity to become a part of the global value chain to leverage its technological skill and low cost of labour, creating immense employment and other opportunities to combat the falling growth, as Vietnam has done to expand its exports substantially, by many times more than India’s during the last 10 years. There is hardly any evidence to suggest that FTAs have hurt India; they have rather promoted both exports and imports, while not allowing the trade deficit to swell. In fact, the percentage of trade deficit with its FTA-partner countries has in fact declined. The only country with which the trade deficit has increased is China, with which India has no FTA.
FTAs also allow ample time for an economy to open up and be prepared for the shocks and turbulence that might follow once the imports start flowing into the country freely. Evidence suggests that opening up rather helps. China made rapid economic strides since joining the WTO in 2001 after 15 years of negotiations. Chinese exports had registered astounding growth, while the reduction in import tariffs made Chinese products competitive abroad and led to a burgeoning export market for China. Modern technology and foreign capital flowed into China. It saw greater trade liberalisation and flourishing of a globally competitive domestic Chinese industry driven by private entrepreneurs. Other nations equally benefited from more access to huge Chinese markets. As current global developments demonstrate, to secure a country’s global market access, WTO is no longer enough, and other avenues need to be explored. India’s “Act East” policy has not gathered enough political momentum on the ground, and being a part of RCEP would help achieve its objectives to strengthen connectivity, and thereby improve trade and investment in the region.
It would have veered other countries that see China as a potential threat towards an Indo-Pacific axis around India. It is unlikely that an FTA will be concluded by India with USA or EU, as some analysts hope, simply because such an FTA will possibly be more stringent and against India’s interests. Of course, it would have suited China’s interests, in view of the ongoing China-US trade war, to make the RCEP operational as early as possible. Every country has the right to protect its selfinterest first, and 30 rounds of negotiations since 2012 have failed to address India’s concerns about the lack of adequate safeguards against a possible surge in imports from the member countries. Unfair competition always hurts, but the real issue is whether we have done enough to make our industries internationally competitive to expand our export base.
The protection provided to domestic firms against competition only leads to inefficiency, making unproductive firms survive at the cost of more productive ones. Competition weeds out such inefficiency from the market, and through a process of creative destruction, firms that reinvent themselves through investments in technology and innovation only become able to compete globally and drive the growth engines of the country. The government’s role is only that of an enabler, through purposeful and sustained reforms, to create the conditions necessary for such revival. India has somewhat reformed its tax structure and financial market, but a lot remains to be done in labour and land, as also to lower its high input costs like borrowing costs, electricity, rent, etc. In a globally connected flat word, import substitution and protectionism are regressive policies that will only make our industries less competitive, affect exports and growth and escalate the trade deficits further. Sitting out to perpetuate inefficiency cannot be an option for a forward- looking nation.
(The writer is a commentator. Opinions are personal)